Wendy’s stock price has taken a beating over the past six months, shedding 24.1% of its value and falling to a new 52-week low of $6.24 per share. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Wendy's, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Wendy's Will Underperform?

Despite the more favorable entry price, we’re cautious about Wendy's. Here are three reasons why WEN doesn’t excite us, plus one stock we’d rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.

Wendy’s demand has been shrinking over the last two years as its same-store sales have averaged 2.5% annual declines.

2. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Wendy’s revenue to stall, a deceleration versus This projection is underwhelming and implies its menu offerings will face some demand challenges.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Wendy’s $4.12 billion of debt exceeds the $298.7 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $509.2 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Wendy's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Wendy's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Wendy's, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 12× forward P/E (or $6.24 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d recommend looking at the most dominant software business in the world.

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